$908 Bn. Relief Bill Seen

Update 493 — $908 Bn. Relief Bill Seen:
A Starting Point Bill Then, Dark Winter?

COVID relief before the end of the year suddenly seems like a possibility. Prospects for a $908 billion bipartisan package — a starting point relief bill before the winter blow — have shot up, as have Corona cases since Thanksgiving. 

Although better than nothing, $908 billion is but a decent down payment on what will end up being a much more costly price tag for the recovery. We will need more money and we will need it soon. Hundreds of billions of dollars of unused funds from the CARES Act, already approved overwhelmingly by Congress, are waiting to be repurposed. 

Below, we examine the debate about the Fed facilities (the source of the repurposable bounty), relevant hearings from this week, and what Democrats can do to build on the initial package. 

Good weekends, all…

Dana

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This week, the Senate Banking and House Financial Services Committees held hearings on the Treasury and Federal Reserve’s response to the coronavirus pandemic and the accompanying recession. The hearings focused on the Fed’s emergency lending programs and Secretary Mnuchin’s recent decision to claw back the unused backstop funds allocated by the CARES Act. 

The Fate of the 13(3) Facilities

The Fed’s emergency lending facilities are set to sunset at the end of the year unless the Fed and the Treasury agree to an extension. Two weeks ago, Secretary Mnuchin sent a letter to Chair Powell requesting that the Fed’s 13(3) facilities backed by CARES Act funds be sunsetted on December 31 and that unused funds be returned to the Treasury. In an unexpected turn, Powell agreed to Mnuchin’s request the following day.

Powell previously advocated for the continuation of the facilities. The Fed Chair stated that despite their low utilization, the facilities have provided important backstops for the financial system and opened opportunities for private borrowers. Powell has also voiced a gloomier view of the economy as one still needing significant fiscal support, while Mnuchin has held to the Republican line that the major cause of the recession has been state and local lockdowns.

In total, Powell will return $428 billion in unused Title IV funds while retaining $26 billion to backstop already dispersed loans. Instead of going back to the Treasury’s Exchange Stabilization Fund (ESF), the funds will go straight to the General Fund where they will require congressional approval for any future uses. 

Democrats’ Blessing in Disguise

Mnuchin’s recent decision to close the $454 billion in Fed emergency lending facilities was the focus of both the House and Senate hearings, entitled: “Quarterly CARES Act Report to Congress.” While Republicans cheered on the facilities’ demise, Democrats criticized the move, insisting that Mnuchin’s choice was politically motivated, tempting a double-dip recession under the new administration’s watch. 

Though Senate Democrats maintained that the lending facilities were a crucial line of defense in case of future financial turmoil, House Democrats pursued a different approach. During the Financial Services Committee hearing on Wednesday, House Democrats focused on Mnuchin’s decision to return the unused funds to the Treasury’s General Fund rather than the ESF, arguing that the CARES Act already provided for any remaining funds to be transferred to the General Fund in 2026. The General Fund provides less flexibility, as Biden’s Treasury Secretary can access funds in the ESF but not in the General Fund without Congressional approval. 

During the hearing, Mnuchin told his critics that his decision to not extend these facilities was a legal decision not an economic one. While he admitted that there were alternative readings of the CARES Act’s language at the Senate Banking hearing, Mnuchin said he found “it implausible that any member of this committee believed that in voting for the CARES Act, you were authorizing me to invest $500 billion to make loans in perpetuity.” Mnuchin maintained throughout both hearings that he was abiding by the statutory deadline set in the CARES Act to wind down the Fed’s credit facilities by the end of the year.

Though Powell acknowledged that the Secretary’s decision about the CARES Act money was “entirely his to make,” Powell did not endorse Mnuchin’s decision. At one point during the Senate Banking hearing, Powell admitted that the Fed would have preferred to continue the facilities as backstops. Mnuchin and Powell both sought to play down this inter-agency rift during the hearings. In fact, if Mnuchin had extended the 13(3) facilities across the board, Powell and the Democrats would see less available for relief. 

After Starting-Point Relief, Opportunity Ahead

Democrats may criticize the move, but absent legislative action, the Title IV funds will be moved from the Fed to the Treasury’s General Fund on December 31. Powell has conceded to Mnuchin’s interpretation of the law, leaving little for Democrats to do now that the decision has been made. 

In the meantime, Democrats can prepare for what to do with the funds once they have been returned to the Treasury. In terminating some of the least effective and most expensive facilities, Mnuchin created an impetus for Democrats to redeploy these funds for fiscal relief and stimulus. But time is tight. Bipartisan negotiations are ongoing, and many proposals seek to repurpose these funds, but Congress has fumbled the ball too many times to have faith in a meaningful outcome. 

The Biden administration and the Democratic caucus have a variety of options for both the funds remaining in the ESF and the General Fund. With roughly $50 billion available in the ESF and businesses and municipalities still struggling, the future Secretary must determine which facilities are the most effective in providing relief to those struggling the most. 

Any resuscitation of the MSLP or MLF should entail a major reworking of the facilities’ terms. Perhaps these less effective facilities alongside the wealth-distorting corporate bond-buying facilities should end altogether at the opportunity cost of direct relief to the small businesses and municipalities.

Congress will then have a pool of over $400 billion appropriated funds that can be reauthorized for fiscal relief. Among the most pressing concerns is the impending cliff for unemployed workers receiving benefits from the CARES Act. The Pandemic Emergency Unemployment Compensation and Pandemic Unemployment Assistance programs are both set to expire the day after Christmas, leaving 12 million workers without income. 

Lame-Duck Compromise?

The newly-introduced bipartisan $908 billion relief bill sets aside $180 billion to extend the CARES unemployment programs along with a $300 per week re-up for four months. The freed-up money from the Fed programs could easily cover the bipartisan bill’s unemployment program costs, with the $160 billion it allocates for state and local municipal relief — with money to spare. 

To win over progressives on the new bill, the legislation could include a second round of direct $1,200 stimulus payments using the leftover funds, a widely popular proposal. The CARES Act’s stimulus payments cost only about $300 billion and are estimated to have kept over 8 million people out of poverty. The funds could also be put toward another round of Paycheck Protection Loans or increased state and local relief — moving that amount closer to the $900 billion requested by Democrats in the HEROES Act. 

Even with these inclusions, the bill may be a non-starter for Democrats given the inclusion of liability protections. Regardless of the funds’ use, Democrats must begin to look at Mnuchin’s decision as an action-forcing-event and an opportunity to deliver a starting point for effective relief at last to the American people, rather than a point of surrender. 

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